Will the Russell Midcap Value Index Strike the Right Balance?

Heartland: Will the rebalance affect the advantage that low interest rates have provided the Russell Midcap® Value benchmark?

Colin McWey: The weighting to Energy and Industrials will rise. As a result, the benchmark should benefit from higher inflation than it would have in the past. Before last year’s rebalancing, it was a very disinflationary benchmark.

Frankly, we’ve been finding good companies in the past year that would also benefit in a higher rate scenario. The Index, with its considerable exposure to bond proxies, can still get hurt significantly from interest rate increases. When rates increase, we think investors won’t be willing to continue to pay up for bond-like equities.

Heartland: Beyond the nuts and bolts of sector weightings, how has the Index changed over the years due to rebalancing?

Colin McWey: The Index is no longer as dollar centric. A couple of years ago it was dollar sensitive, which was tough for us because it benefited as the dollar appreciated. We weren’t finding as much value in some of the biggest beneficiaries such as Utilities, Real Estate Investment Trusts (REITs), and Consumer Discretionary as we were elsewhere. To be fair, the dollar weakening in and of itself would not be as bad for the benchmark as it would have been in the past. Energy, commodities, and other inflation driven areas do well with a weaker currency. That has helped offset the fact that REITs enjoy dollar strength. Utilities enjoy a stronger dollar too, but because of low bond yields and low inflation, the group has thrived despite recent dollar weakness.

We’ve been in front of positioning the portfolio appropriately if the dollar bull market comes to an end. We were helped when dollar strength started to break about a year ago, having already been well positioned in compelling opportunities in Energy, Materials, and some Industrials. The result is we are positioned for a weakening dollar, and may be a little bit ahead of the curve.


Past performance does not guarantee future results.

Sector rebalancing of the Russell indexes is scheduled to take effect at start of trading on 6/27/2016.

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic Predictions are based on estimates and are subject to change.

Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk their intrinsic value may not be recognized by the broad market.

Sector and Industry classifications as determined by Heartland Advisors may reference data from sources such as FactSet Research Systems Inc. or the Global Industry Classification Codes (GICS) developed by Standard & Poor’s and Morgan Stanley Capital International.

Definitions: Real Estate Investment Trust (REIT) is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. Russell Midcap® Value Index: measures the performance of those Russell Midcap® Index companies with lower price-to-book ratios and lower forecasted growth characteristics. All indices are unmanaged. It is not possible to invest directly in an index.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Frank Russell Investment Group.

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